In this edition of "Ask the Underwriter" we break down a post from a current Texas homeowner who is looking to refinance before buying a new home.
Grab a coffee and let's get started. As you can see there are a handful of great questions, let's start at the top.
"My wife and I have $100,000 remaining on the 15-year mortgage for our current home in Texas. This has been our primary residence for the past 7 years and we want to refinance into a 30-year mortgage and take out the maximum cash allowed. Similar properties are apparently selling for roughly $1MM. We have excellent credit and no debt outside of this mortgage."
"We want to move to a larger home in 8-15 months and are considering keeping this home to use a rental. I've listened to some real estate podcasts lately and have learned that it isn't that wise to have your own house completely paid off! However, I haven't been able to find much information.”
As you can see there are a handful of great questions, let's start at the top.
What is the Maximum Loan We Can Take Out on the House?
If you are going to get a conventional mortgage (backed by Fannie Mae or Freddie Mac) the maximum Loan to Value (LTV) for a cash-out refinance on a primary residence is 80%. So you can get a loan for 80% of your home’s appraised value. Conventional mortgages come with limitations on just how big of a mortgage you can obtain, though. The 2021 conforming limit for all counties in Texas is $548,250. So, you can take out a loan for 80% of your home’s value or the max loan amount in your county, whichever is less. If you decide to get a jumbo loan there is no max loan amount, but the LTV is typically limited to 75% with most lenders.
If We Plan to Rent Our House out Either in 6 Months or the Worst Case, 18 Months Later, is That OK?
Yes, it is okay if you decide to rent out the home and buy a new primary residence regardless of when you took out the new mortgage on your current home. You will just have to provide a letter of explanation saying that you decided to buy a new primary residence because your current home is too small, too far from work, etc.
Would We Have Any Issues Getting Another Residential Loan in 6 Months or 1 year?
Good news here! You shouldn't have any problem getting a new mortgage in this timeframe.
How Do You Calculate How Much You can Borrow? I've Heard 38% of Gross Salary and "70%" of Rental Income
With a conventional mortgage, you can have a maximum Debt to Income (DTI) ratio of 50%. This includes your housing payments and all other liabilities.
For example, if you make $10,000 per month you can have $5,000 in total liabilities. Your DTI is based on your gross income, before taxes and deductions. But what about the rental income?
You can use 75% of the projected rental income from the home you will be vacating to qualify.
Rental income calculation example: Gross rent ($1,000 x 75% = $750) - housing payment ($500) = $250
So the full mortgage payment would be offset (not included in your DTI), and you would add $250 to your qualifying monthly income!
Are Interest Rates Going Up?
Interest rates are low right now, which means it's a great time to refinance. That's not to be overlooked. However, rates go up and down and anyone who tells you that rates today are lower than they will be a year from now can't actually guarantee that.
What is a Good resource to Ask Questions Regarding Refinancing or Home Mortgages?
Great question! You can email us, call us, or send us a note on Facebook.
